What Is an Alternative Credit Score—And How Can It Benefit You?
Although the mean nationwide FICO score recently reached 704, this development was noteworthy precisely because it marked the first time the average American was considered to have “good” credit. For those with lower scores, accessing low-interest loan products or qualifying for an apartment or auto lease can be a struggle, even with a solid history of on-time payments.
Fortunately for both lenders and borrowers, the reliance on “traditional” credit scoring models seems to be waning, with more and more lenders taking the holistic approach that's offered through an alternative credit score. Learn more about what goes into an alternative credit score and how the use of such a score can benefit lenders.
What is an Alternative Credit Score?
Although the scoring models for traditional credit scores are proprietary, there are six main factors that go into these credit scores: total credit utilization, length of credit history, number of on-time payments, number of accounts, number of “hard” credit inquiries, and the number of derogatory marks (like accounts in collection or foreclosure).
While some of these factors can be an appropriate measure of a borrower’s creditworthiness, others—particularly the length of credit history and the total number of accounts—can majorly depress scores for young or “unbanked” consumers.
An alternative credit score, on the other hand, allows these consumers to benefit from timely paying rent, utilities, and other “non-reporting” debts. Not only does this provide consumers with the literal and figurative credit they deserve, but it also helps them avoid the pressure of having to open new accounts or use a credit card just to boost the perception of their creditworthiness.
Who Can Benefit From an Alternative Credit Score?
For many consumers, a traditional credit score simply doesn’t tell the whole story. In a time before electronic banking, consumers could often meet with a loan officer and explain, face-to-face, the various factors that make them a good credit risk. But today, these important decisions are often made by algorithm, providing no opportunity for borrowers to compensate for a fair or poor credit score.
Although just about anyone with a history of timely payments can benefit from an alternative credit score, the use of these scores is especially helpful for consumers who are just beginning their credit journey or those who have recently declared bankruptcy or gone through a foreclosure or short sale. These factors can depress a traditional credit score, while evidence of timely payments or a steady income can prove that the borrower has the desire and ability to repay any credit that is extended.
What Do Lenders Think?
By using multiple sources of data, lenders are now able to get a far better picture of a borrower’s creditworthiness than with a numerical score. And although some lenders were initially resistant to this change, a recent report reveals that four in every five lenders admit to using a combination of traditional scoring data and alternative loan applicant data like utilities to credit score.
If you're interested in joining the ranks of those who prefer a more holistic approach to lending, PRBC (Payment Reporting Builds Credit) can help. Since 2005, we've offered a broad range of alternative credit reporting and consumer report products, assessing the creditworthiness of the 100 million people who lack a credit history with the big three credit scoring bureaus.